There is a piece missing from our economic recovery, and it’s not just us; the US is also hunting for the same elusive piece of the jigsaw – productivity growth.
At its simplest level, productivity is the amount produced by the average working person over a period often expressed as economic output per hour. No doubt you’ll have seen recent headlines comparing the UK with our European peers. According to the figures, German workers could pack up for the week on a Thursday evening and still produce the same amount as workers in the UK.
Productivity growth has stagnated post-recession. In the decade before 2008, the US and UK economies grew by average rates of 3 per cent a year. Two-thirds of this growth was attributable to productivity gains and the remainder came from increasing the number of people employed. Since 2010, productivity has contributed just 0.7 per cent a year to annual UK economic growth of 2 per cent. As we’ve got nearer full employment and with a policy environment favouring reduced immigration, workforce expansion is unlikely to provide much boost in the short term, so we need to solve the productivity puzzle to support future growth.
Why is productivity so elusive? Great minds have been exercised for many years attempting to solve this particular question. One theory is that low interest rates induce economic laziness – companies have been incentivised to return capital to shareholders rather than invest in productivity-enhancing technology. Another theory is that low wage inflation might have negatively affected worker motivation. Lastly, others have pointed to changing employment practices embodied by my Amazon Prime membership – is it really economically or environmentally efficient to have someone deliver my £5 order of dog food direct to the door with little extra cost?
Comparisons with Germany also tend to highlight differences in infrastructure and the particular UK problem of the affordability of housing in our cities. The lower levels of investment in transport and technology in the UK have had negative implications for productivity. Commuters are also more likely to be stressed, and stress has been shown to have a clear link to productivity. Excessive pressure in the workplace has links to disengagement and absenteeism, according to research from Towers Watson, both of which are indicators of low productivity. Employers are recognising this link and increasingly talk about wellbeing. But British workers are working longer hours than their European counterparts: in 2015 British workers worked 303 hours more than German workers, equating to 38 days over the year. So we have more people working longer hours – perhaps not surprising, then, that the productivity measures based on hourly output are weaker.
What can we do about this? Investment seems to be the consensus, whether investing in technology, or the skills, education and wellbeing of existing employees. But are we measuring the right thing? Does increasing output per worker make people in this country better off? As regular readers of my column will know, I admire Bhutan for using “gross national happiness” as an indicator of economic success, and I was delighted to see that it is trialling the application of its national accounting metric to business. It is aiming to steer businesses away from a focus on short-term benefits, measured by monetary output, towards long-term responsible and sustainable values. Perhaps we could increase productivity by making people happier.
Kate Rogers is head of policy at Cazenove Charities